Opinion and Analysis
Ponder Midiwo’s view on bank rates
Posted Thursday, October 11 2012 at 19:42
- The truth of the matter is that the government has no strong levers it can use to influence banks into behaving in line with broader macro-economic objectives and plans.
- Indeed, banks in this country thrive on volatility: they will promptly raise their lending rates even as they apply a lag on the deposit rates.
- What Mr Midiwo is proposing is a tool for what economists refer to as moral suasion without coercing them.
Jakoyo Midiwo’s proposal that the government should use the huge deposits it holds in the banking system as a lever to force banks to reduce interest rates-spreads is not altogether without merit.
In a nutshell, his proposal is as follows: First, you close all government deposits in banks and place them with a few large local banks.
Secondly, leverage these deposits as the carrots and sticks which you can then use to influence policy and behaviour of banks.
The problem is that Mr Midiwo has not argued his case persuasively. The truth of the matter is that the government has no strong levers it can use to influence banks into behaving in line with broader macro-economic objectives and plans.
When the shilling went haywire early this year, we did not know what to do. The Central Bank of Kenya found itself helpless. Whenever the Central Bank Rate or even the Cash Reserve Ratio is reduced, banks don’t respond immediately.
Indeed, banks in this country thrive on volatility: they will promptly raise their lending rates even as they apply a lag on the deposit rates.
Whenever the benchmark rate trends downwards, they lower the deposit rates but remain reluctant to lower their base lending rates.
The upshot of all this are wide spreads between lending and deposit rates that are permanently in double-digits. Then there is the issue of concentration of power in the hands of only a few players.
During the reign of Mr David Mwiraria as Finance minister — and following an interest rates crisis when the bond market almost collapsed — the government suspected that a group of large banks were colluding to stay out of Treasury Bill auctions in order to influence interest rates.
The oligopolistic structure of the banking sector is such that a few chief executives can today meet and decide that they are not participating in the Treasury Bill auction for that week.
What Mr Midiwo is proposing is a tool for what economists refer to as moral suasion — where a regulator applies informal pressure to force the market to adhere to a specific national policy objective — without coercing them.
We want a situation where the Treasury can call a few local banks to a meeting and — using carrots and sticks — influence them into doing what is in the long term interest of the country.
Two years ago when banks in South Africa refused to reduce rates to reflect changes in the benchmark rate, authorities there threatened to withdraw government deposits.
Fortunately, we have a good number of big locally-owned banks which the government can work with to influence policy. Out of the 10 top banks in Kenya, seven are local.
A study conducted recently by the International Monetary Fund found that the government had 10,000 accounts scattered in the banking system.